The Paris Agreement under Trump and the Merits of an Economy-Wide Carbon Tax

The election of Donald Trump has cast significant uncertainty over the future of the Paris Agreement to combat global climate change, as the president-elect actively campaigned to pull the United States from the international accord. Under this agreement, which officially went into force in November 2016, the United States (under President Obama’s leadership) pledged to reduce greenhouse gas emissions by 26–28 percent relative to 2005 levels by 2025. Despite his assertion that climate change is a “hoax” created by China, however, Trump has moderated his hardline approach since the election by stating that he would keep an open mind on the agreement.

Should the president-elect choose to pursue policies to meet the US pledge, as urged by over 600 US companies, what options exist to reduce greenhouse gas emissions below projected business-as-usual levels? A regulatory approach through the Clean Air Act is likely out of the question, given Trump’s nomination of Scott Pruitt (a vocal critic of the Clean Power Plan) to lead the US Environmental Protection Agency (EPA). Still, if we assume that EPA’s Clean Power Plan is upheld in the court system or not dismantled by the incoming Trump administration, US emissions in 2025 are projected to be only 14 percent below 2005 levels under current law. Even with additional regulatory measures that have been proposed by the Obama administration—such as heavy-duty fuel economy standards, energy efficiency regulations for both buildings and appliances, new standards for addressing methane emissions from landfills and the oil and gas sector, and EPA’s Significant New Alternatives Policy (SNAP) to reduce hydrofluorocarbons—US emissions levels in 2025 are projected to be only 19 percent below 2005 levels, still well short of the 26–28 percent target.

Yet Trump’s nomination of Rex Tillerson for secretary of state suggests a possible alternative policy approach—a revenue-neutral, economy-wide carbon tax. As CEO of ExxonMobil, Tillerson has publicly backed the idea since 2009. Using the Goulder-Hafstead E3 model, we investigated how such a tax on carbon dioxide emissions from combustion (representing about 75 percent of US greenhouse gas emissions) could be designed to meet the US target at a relatively minimal cost.

In particular, we illustrate the carbon tax price paths that would be necessary to meet the 28 percent emissions reduction target, assuming that the Trump administration does away with the Clean Power Plan. Our simulations show that in the unlikely case that the new administration pursues the proposed regulations on methane and hydrofluorocarbons, an economy-wide carbon tax implemented in 2017 and reaching $21–22 (in 2013$) per ton in the year 2025 would achieve the ambitious goal of reducing emissions by 28 percent. In the more likely scenario that those non-carbon greenhouse gas regulations are scrapped, we find that an economy-wide carbon tax starting in 2017 and reaching $37–38 by 2025 would hit the target. In both scenarios, the tax could be phased in over time, between 2017 and 2025, reducing the economic cost of such a policy in the very near term.

Our analysis shows that the way the revenue is used does not significantly impact the tax needed to meet the US commitment under the Paris Agreement—but does significantly impact the costs of the policy. We examined four uses of the revenue from an economy-wide carbon tax and find that a tax of $21 per ton of emissions would impose welfare costs of $34 per ton reduced if revenues were used to provide dividend checks to each household. However, we also find that, relative to the tax and dividend policy, using the revenues to finance cuts in payroll taxes, personal income taxes, or corporate income taxes would reduce the welfare costs of meeting the pledge by about 19 percent, 31 percent, and 75 percent, respectively.

So what’s the takeaway? These results show that President-elect Trump could use a modest, economy-wide carbon tax to finance the type of tax reform he has routinely advocated and to place the United States on track to meet its Paris Agreement target, maintaining its status as a global leader on climate change—if he chooses to not pull out of the accord. And he could do so while also eliminating the Clean Power Plan, as promised. Further, our work illustrates that all three goals could be achieved at a relatively minimal cost. Whether the president-elect would consider or accept such a deal is an open question—but we firmly believe that a modest, revenue-neutral carbon tax that finances personal or corporate tax reform remains a viable option for the United States, with the potential to achieve multiple policy objectives.

The views expressed in RFF blog posts are those of the authors and should not be attributed to Resources for the Future.